Public capital in the 21st century: as productive as ever?

Abstract

The global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe. In the ensuing fiscal adjustment process, public investments were severely reduced in many countries. How harmful is this for growth perspectives? Our main objective is to find out whether the importance of public capital for long run output growth has changed in recent years. We also aim to provide information on the relevance of international spillovers of public capital. To these ends, we expand time series on public capital stocks for 20 OECD countries as constructed by Kamps (2006) and estimate country-specific recursive VARs. Results show that the effect of public capital shocks on economic growth has not increased in general, although results differ widely between countries. This suggests that the current level of public investments generally does not pose an immediate threat to potential output. Of course, this could change if low investment levels are sustained for a long time. We furthermore provide some tentative evidence of positive spillovers of public capital shocks between European countries.

Business investment in EU countries

“…In the single-country versus broader-based expansion exercise, the elasticity of output to public capital is set at 0.1, in line with other recent works (Elekdag and Muir, 2014;de Jong et al, 2017b) and again with the empirical evidence in Bom and Ligthart (2014). The evidence collected by de Jong et al (2017a) indicates that the effects of public capital shocks on output growth are very heterogeneous across the OECD countries. In a study focused on Europe, de Jong et al (2017b) provide VAR-based estimates of the impacts on output of an increase in the public capital stock in 12 EU countries and find that it enhances productivity in most of these economies.…”

Impact of Government Expenditure on Economic Growth in Nigeria, 1970-2019

“…The study argues that the empirical assessment of capital expenditure without considering the effect of depreciation which is the most common approach used by previous studies does not appear to capture the long-run effect of the variable correctly. Therefore, the study transformed public capital expenditure to a stock variable using perpetual inventory method as suggested by Berlemann and Wesselhöft (2014), Kamps (2006) Jong et al, (2018).…”

Can an Increase of Infrastructure Spending Contribute to Higher Potential Output in the Medium and Longer Term?

“…As Generally speaking, the economic literature (Aschauer [66]; Kamps [67] and [68]; IMF [69]; De Jong et al [70]) has proven that an increase of public spending and in particular on infrastructures can positively affect the economy in two ways. In the short term it boosts aggregate demand through the short-term fiscal multiplier, also by potentially crowding in private investment, given the complementary nature of infrastructure services.…”